Also the expected return on the market portfolio is 155 percent a Calculate the

# Also the expected return on the market portfolio is

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The risk-free rate is 7 percent. Also, the expected return on the market portfolio is 15.5 percent. a. Calculate the expected return of your portfolio. (Hint: The expected return of a portfolio equals the weighted average of the individual stock's expected return, where the weights are the percentage invested in each stock.) b.Calculate the portfolio beta. c. Draw the SML and show each security expected and required rates of return. Define whether portfolio and individual stocks are overvalued or undervalued. Answer (a) The portfolio expected return, ¯ k p , equals a weighted average of the individual stock's expected returns. ¯ k p = (0.20)(16%) + (0.30)(14%) + (0.15)(20%) + (0.25)(12%) + (0.10)(24%) = 15.8% (b) The portfolio beta, ß p , equals a weighted average of the individual stock betas ß p = (0.20)(1.00) + (0.30)(0.85) + (0.15)(1.20) + (0.25)(0.60) + (0.10)(1.60) = 0.95 (c) Plot the security market line and the individual stocks. If expected return is higher than required rate of return then this stock/portfolio is undervalued. And vice-versa for overvalued stock/portfolio.
5. Following are given for 2 stock portfolio. Decide which combination and allocation of funds would you choose for a \$100 000 investment opportunity. Discuss about the various outcomes of this portfolio. Emphasize the best choices of a risk averse and risk neutral investors If you are a risk averse investor, then you would allocate 40% of funds to stock C and 60% to S since coefficient of variance (risk per unit of return) and riskiness level (standard deviation) is minimal. However, if you were a risk neutral one, then you might decide on 20% and 80%

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